U.S. Cracks Down on "Reverse Redlining"

In all the fallout from the housing crisis, few groups have suffered as much as blacks and minorities, who were saddling with risky subprime loans at rates far higher the whites with the same incomes or credit scores.

Yesterday, the Civil Rights Division of the U.S. Department of Justice announced that it's launching a new unit specifically to fight racial discrimination in lending, including mortgage lending. This is history in the making. The feds have in the past cracked down on discrimination by landlords and real estate agents by enforcing fair housing laws, used the Home Mortgage Disclosure Act to expose patterns of exclusion by mortgage lenders, and put out research like last year's report from the Commission on Civil Rights about how targeting of minority borrowers fueled the mortgage crisis.

But this is the first time that law enforcement at the national level has stepped up to target discrimination in mortgage lending as an issue in its own right.

The new Fair Lending Unit's main focus will be "reverse redlining," and to understand what that means it helps to get a quick history lesson.Ironically, the federal government played a pivotal role in promoting discrimination in mortgage lending in the first place. Back in the 1930s, with its Home Owners Loan Corporation and later the Federal Housing Administration, officials published maps that showed where the government would and would not back mortgages – and the neighborhoods that were off limits were invariably those that were majority African American. The government rules endorsed existing mortgage industry practice, and set the stage for four decades in which white, suburban borrowers could easily get home mortgages and black and urban borrowers generally could not, no matter how good their credit was.

In the early 1970s, community activists dubbed the exclusion "redlining" after the lines on the maps, and succeeded in largely ending it with the help of the Community Reinvestment Act, which requires banks to meet the credit needs of the communities where they operate. (And please, please, don't go blaming CRA for the crisis – the law does not require lenders to lend to unqualified borrowers, and virtually all subprime and other high-risk lending was done by lenders not covered by CRA.)

What emerged in redlining's place, with the help of a new Wall Street market in mortgage-backed securities looking for new business opportunities, was "reverse redlining" – the deliberate targeting of those once-excluded neighborhoods and borrowers for subprime and other high-risk loans.

"It's discrimination with a smile, and it tears communities apart," Civil Rights Division chief Thomas Perez told Jesse Jackson's PUSH Coalition yesterday, at its annual conference about Wall Street. Perez' home community of Montgomery County, Maryland, is a case in point: high-income black borrowers were six times as likely as white borrowers with similar incomes to be stuck with a subprime loan.

Now, some of that disparity may be due to borrowers' credit ratings, but other research has found that, nationally, black borrowers were up to three times likelier than white borrowers with the same credit scores to get a subprime mortgage, at all income levels. Subprime lenders specifically sought out first-time, minority borrowers unfamiliar with the ins and outs of homebuying, often working through trusted neighborhood institutions like churches. At least one lender, Wells Fargo, even gave pastors kickbacks for every loan sold!

So what is the Department of Justice going to do about it? It promises to dust off two laws that haven't seen much use lately, the Fair Housing Act and the Equal Credit Opportunity Act, to keep loan originators in line - whether they're redlining or reverse redlining. And while Congress dawdles about establishing a Consumer Financial Protection Agency, the new unit is jumping right in and cracking down. Vowed Perez: "We will target abuses by unscrupulous brokers, who all too frequently went unregulated during the heady days of the housing boom, and were allowed to offer unaffordable or unsustainable loans to unsuspecting homebuyers."
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